David M. Gottlieb, Professional Corporation v. Swiss Investments Inc., 2012 ABQB 64

Court of Queen ’ s Bench of Alberta Citation: David M. Gottlieb, Professional Corporation v. Champion Homes Inc., 2012 ABQB 64 Date: 20120124 Docket: 1001 07856 Registry: Calgary Between: David M. Gottlieb, Professional Corporation and Swiss Investments Inc.

Plaintiffs/Appellants - and - Champion Homes Inc., 1412263 Alberta Ltd., and Satpal Nahal Defendants/Respondents Corrected judgment: A corrigendum was issued on January 30, 2012; the corrections have been made to the text and the corrigendum is appended to this judgment. _______________________________________________________ Reasons for Judgment of the Honourable Madam Justice C.L.

Kenny _______________________________________________________ [ 1 ] The issue on this appeal is whether the unilateral discharge, by a mortgagee, of a mortgage granted by one mortgagor against a property owned by it, satisfies the debt owing under that mortgage, and thereby renders unenforceable a collateral mortgage granted by a second mortgagor against a second property that was granted to secure the same debt. A. Overview [ 2 ] This is an appeal from the decision of Master Hanebury in David M. Gottlieb, Professional Corp. v. Champion Homes Inc , 2011 ABQB 250 , [2011] A.W.L.D. 2501.

[ 3 ] The Respondent, Satpal Nahal (Nahal), granted 907840 Alberta Inc. (907840) a $530,000 mortgage on property owned by him (the 907840 Nahal Mortgage). Subsequently, the Respondent, Champion Homes Inc. (Champion), a company in which Nahal was a principal, granted 907840 a $530,000 collateral mortgage on property owned by it (the 907840 Champion Mortgage) to secure the same debt. Nahal also granted 907840 a collateral mortgage on another property owned by him (the Nahal 70 Acre Parcel) to secure the same debt.

These three mortgages are collectively referred to herein as “the 907840 Mortgages”. [ 4 ] The 907840 Nahal Mortgage was unilaterally discharged by the mortgagee. The Master ruled that when the mortgagee unilaterally discharged the mortgage, the debt secured under that mortgage was deemed to be satisfied, which meant that there was no debt to secure under the 907840 Champion Mortgage. The Appellants appeal this decision. [ 5 ] The facts are complicated and there were several issues before the Master. The Master ruled that the core issue was the effect of the unilateral discharge of the mortgage.

Given her conclusion that the debt was deemed to be satisfied by the discharge, she ruled that it was unnecessary for her to deal with the other issues raised by the parties. B. Facts [ 6 ] David Gottlieb is a principal of the Appellants, David Gottleib, Professional Corporation and Swiss Investments Inc. The 907840 Mortgages were transferred to Swiss Investments and Olympia Trust Company and then unilaterally discharged by them. [ 7 ] The Respondent, Nahal, was a principal of the Respondents, Champion and 1412263 Alberta Ltd. (1412263).

The Champion lands upon which the 907840 Champion Mortgage was registered were subsequently transferred to 1412263. [ 8 ] Nahal and Champion owned a number of properties in the City of Calgary. Over the period between 2006 and 2008, the Appellants loaned Nahal and Champion several sums of money. Each was secured by mortgages registered against several properties, some of which were owned by Nahal and some of which were owned by Champion. [ 9 ] These proceedings involve two properties. [ 10 ] The first property is the Nahal property against which the 907840 Nahal Mortgage was registered (the Nahal 40 Acre Parcel).

Nahal also granted other mortgages on this property to the Appellants and other third party mortgagees. [ 11 ] The second property is the Champion property against which the 907840 Champion Mortgage was registered (the Champion 11 Avenue Apartment). Champion also granted other mortgages on this property to the Appellants and other third party mortgagees.

As noted above, this property was subsequently transferred to 1412263 which subsequently granted Peoples Trust a mortgage on the property. [ 12 ] The Respondents defaulted on the mortgages granted to them by the Appellants, 907840, and Peoples Trust and each of these mortgagees commenced foreclosure proceedings on their respective mortgages on both properties.

The properties were subsequently sold under final orders for foreclosure. [ 13 ] Prior to the granting of the final order for foreclosure on the Nahal 40 Acre Parcel, Swiss Investments and Olympia Trust Company (Swiss/Olympia) purchased and were transferred the mortgages and causes of action under the 907840 Mortgages. Swiss/Olympia then unilaterally discharged the 907840 Nahal Mortgage on the Nahal 40 Acre Parcel. 1. Mortgages and foreclosure proceedings on the Champion 11 Avenue Apartment under this Action No. 1001-07856

[ 14 ] These proceedings arise in the context of foreclosure proceedings commenced by the Appellants to enforce a $590,000 first mortgage granted to them by Champion on the Champion 11 Avenue Apartment, municipally described as at 2005 - 11 Avenue S.W., Calgary Alberta and legally described as: Plan 5700 AG Block 241 Lots 7 and 8 Excepting thereout all mines and minerals [ 15 ] The property was eventually sold under an order for judicial sale granted in January 2011.

Prior to the judicial sale, the encumbrances registered against title, in order of priority, were as follows: Mortgages on Champion 11 Avenue Apartment Prior to Judicial Sale Registration Date Mortgagee Instrument # Original Amount March 22, 2007 Gottlieb/Swiss Investments 071 140 648 $590,000 July 28, 2007 907840 Mtge transferred to Swiss /Olympia on Nov 9, 2010 $530,000 August 11, 2008 Peoples Trust 081 291 638 $1,630,550 a) $590,000 first mortgage to Appellants registered March 22, 2007 [ 16 ] A $590,000 first mortgage from Champion to the Appellants was registered against the Champion 11 Avenue Apartment as Instrument No. 071 140 648 on March 22, 2007.

Champion also granted the Appellants a $590,000 mortgage on condominium units owned by it (“the Champion Condo Lands”), which the Appellants subsequently discharged against some of those units.

In addition, Nahal personally guaranteed the payment of the mortgage by Champion under a guarantee dated January 12, 2007. b) $530,000 second mortgage to 907840 registered July 28, 2007 (“the 907840 Champion Mortgage”) [ 17 ] A $530,000 second mortgage from Champion to 907840 was registered against the Champion 11 Avenue Apartment as Instrument No. 071 337 225 on July 28, 2007. [ 18 ] As noted above, the 907840 Champion Mortgage was given as collateral security for the payment of the 907840 Nahal Mortgage. c) $1,630,550 third mortgage from 1412263 to Peoples Trust registered August 11, 2008 [ 19 ] After Champion transferred its ownership interest in the Champion 11 Avenue Apartment to 1412263, it granted a $1,630,550

third mortgage to Peoples Trust on the property, which was registered as Instrument No. 081 291 638 on August 11, 2008. [ 20 ] It was a term of the Peoples Trust mortgage that it was to be registered in first position, however, the first mortgage to Gottlieb and Swiss Investments and the second 907840 Champion Mortgage were not paid out and therefore were not discharged.

d) Foreclosure Proceedings [ 21 ] In May 2010, the Appellants commenced this action against the Respondents to enforce their first mortgage of $590,000. [ 22 ] Peoples Trust also commenced foreclosure proceedings under Action No. 0901-08059 to enforce its third mortgage.

On August 5, 2010, Peoples Trust was granted an Order Nisi/Order for Sale ordering a one day redemption period followed by a judicial sale. [ 23 ] On October 21, 2010, the Appellants were granted an order allowing them to conduct the judicial sale of the Champion 11 Avenue Apartment and vacating the Order Nisi/Order for Sale granted to Peoples Trust under their action. [ 24 ] In early 2011, an Order Confirming Sale was granted and sale proceeds of approximately $1,700,000 were paid into court pending the determination of the issues in these proceedings. 2.

Mortgages/encumbrances and foreclosure proceedings against Nahal 40 Acre Parcel under Action No. 1001-11623 [ 25 ] At the same time as these foreclosure proceedings were proceeding, the Appellants were also involved in foreclosure proceedings commenced by them under Action No. 1001-11623 to enforce their $800,000 second mortgage granted to them by Nahal on the Nahal 40 Acre Parcel and legally described as: Plan 9813204 Lot 3 Excepting thereout all mines and minerals [ 26 ] This property was also eventually sold under an order for judicial sale and all of the proceeds were distributed.

Prior to the judicial sale, the encumbrances registered against title, in order of priority, were as follows: Mortgages and Encumbrances on Nahal 40 Acre Parcel Prior to Judicial Sale Registration Date Mortgagee Instrument # Original Amount October 25, 2006 Toronto Dominion $547,500 October 25, 2006 Gottlieb/Swiss Investments 061 444 116 $800,000 May 9, 2007 907840 071 225 305 $530,000

November 9, 2010 907840 Mtge transferred to Swiss /Olympia $530,000 Caveat (Promissory Note) to Mangat 018 066 490 $175,000 claimed July 8, 2008 Gottlieb/Swiss Inv/Olympia Trust 081 239 603 $1,925,000 a) $547,500 first mortgage from Nahal to the Toronto Dominion (TD) Bank registered October 25, 2006 b) $800,000 second mortgage from Nahal to the Appellants registered October 25, 2006 [ 27 ] An $800,000 second mortgage from the Appellants to Nahal was registered against the Nahal 40 Acre Parcel on October 25, 2006 as Instrument No. 061 444 116.

The mortgage was also secured against the Nahal 70 Acre Parcel. c) $530,000 third mortgage from Nahal to 907840 Alberta Inc. registered May 9, 2007 (the 907840 Nahal Mortgage) [ 28 ] A $530,000 third mortgage from Nahal to 907840 was registered against the Nahal 40 Acre Parcel on May 9, 2007 as Instrument No. 071 225 305 to secure a debt of the same amount.

This was referred to as the “primary” mortgage. [ 29 ] As previously noted, two collateral mortgages were also granted to secure the debt owing under the 907840 Nahal Mortgage: a $530,000 mortgage from Nahal to 907840 registered against the Nahal 70 Acre Parcel on May 9, 2007 as Instrument No. 071 337 225, and the 907840 Champion Mortgage.

d) Caveat (Promissory Note) filed by Mangat claiming $175,000 and registered as Instrument No. 081 066 490. e) $1,925,000 fourth mortgage from Nahal to the Appellants and Olympia Trust registered on July 8, 2008 [ 30 ] The $1,925,000 fourth mortgage, registered in fifth security position, from Nahal to the Appellants and Olympia Trust was registered against the Nahal 40 Acre Parcel on July 8, 2008 as Instrument No. 081 239 603 to secure a debt from the Appellants and Olympia Trust to Nahal of the same amount. [ 31 ] The loan was also secured by the following mortgages all granted at the same time as the foregoing mortgage: a $1,925,000 mortgage from Nahal registered against the Nahal 70 Acre Parcel; a $1,925,000 mortgage from Nahal registered against a property owned by Nahal at 741 - 81 Street, Calgary Alberta; and a $1,925,000 mortgage from Champion registered against property owned by Champion at 57 Avenue in Calgary, Alberta.

All of these mortgages were foreclosed off these properties by prior mortgage holders.

f) Foreclosure Proceedings [ 32 ] The Appellants commenced foreclosure proceedings in Action No. 1001-11623 to enforce their $800,000 second mortgage.

[ 33 ] On September 28, 2010, an Order Nisi/Order for Sale was granted with a closing date of November 29, 2010. The sale did not close on November 30, 2010, however, and Order Confirming Sale was eventually granted and closed. [ 34 ] The sale proceeds from this sale were distributed to pay out or pay down the mortgages and encumbrances on title. 3.

Transfer of 907840 Mortgages to Swiss Investments and Olympia Trust and Discharge of 907840 Nahal Mortgage [ 35 ] On October 22, 2010, in an attempt to better their security position on the Nahal 40 Acre Parcel, Swiss/Olympia took an assignment and were transferred the security in all three of the 907840 Mortgages, as well as the causes of action under those mortgages. The Transfer was registered on November 9, 2010 as Instrument No. 101329672.

This had the effect of putting Swiss/Olympia in a third priority position on the title to the Nahal 40 Acre Parcel and in a second priority position on the title to the Champion 11 Avenue Apartment. [ 36 ] Swiss/Olympia then unilaterally discharged the 907840 Nahal Mortgage. The discharge was registered on November 19, 2010 as Instrument No. 101 339 471. The discharge was registered before the closing date for the sale of the Nahal 40 Acre Parcel which was to be on November 30, 2010.

As a result, the monies that would have been paid to Swiss/Olympia under the discharged 907840 Nahal Mortgage were paid to Gottlieb, Swiss Investments and Olympia to pay down their $1,925,000 mortgage, which was registered subsequent to the 907840 Nahal Mortgage. [ 37 ] The Discharge of Mortgage states that the Mortgagees “acknowledge to have received moneys due or to become due” under the 907840 Nahal Mortgage and that they are “entitled by law to receive the said moneys, and discharge the said Mortgage, and that the same is wholly discharged.” However, the Appellants’ uncontradicted evidence is that this language was included in the Discharge based upon the understanding that it was required in order to have the discharge registered.

In fact, Swiss/Olympia received no monies owing under the 907840 Nahal Mortgage. [ 38 ] The Appellants’ evidence is that the decision to discharge the 907840 Nahal Mortgage was made to better the security position of the fourth mortgage to Gottlieb, Swiss Investments and Olympia on the Nahal 40 Acre Parcel, and also because they understood that the debt secured by the discharged mortgage was well secured by the 907840 Champion Mortgage on the title to the Champion 11 Avenue Apartment. 4.

Prior Proceedings [ 39 ] On December 7, 2010, Peoples Trust brought an application to determine the entitlement to the sale proceeds from the sale of the Nahal 40 Acre Parcel, the Champion 11 Avenue Apartment, and the Champion Condo Lands.

The application was heard on January 18, 2011 by Master Hanebury. [ 40 ] Although Nahal was represented during the foregoing application, he took no position on the matters in issue and no representations were made on his behalf. [ 41 ] Master Hanebury ruled that where a mortgagee unilaterally discharges a mortgage thereby preventing the mortgagee from transferring the mortgage to the mortgagor as it is required to do under s. 73 of the Law of Property Act , R.S.A. 2000, c.L-7, “the effect is the same as if the mortgagee had acquired the property by foreclosure and then disposed of it.

The debt is deemed to be satisfied.” She based her conclusion on the Alberta Court of Appeal’s decision in First National Mortgage Co. Ltd. v. L.J. V. Holdings Ltd. , 1989 ABCA 88 , 95 A.R. 237, a decision that was not put before her during the application. C. Law and Analysis 1. Standard of Review

[ 42 ] The standard of review for an appeal from a master is the same standard applied to appeals to the Court of Appeal: Royal Bank of Canada v. Place , 2010 ABQB 733 , [2011] 504 A.R. 230 at para. 28 ; Lee v. LePage , 2010 ABQB 829 at para. 22-23 , [2011] A.W.L.D. 1770. [ 43 ] The standard of review on an appeal from a Master was recently summarized by Macklin, J., in Janvier v. 834474 Alberta Ltd. , 2010 ABQB 800 , [2011] 48 Alta. LR. (5 th ) 156 at para. 18 , as follows: In

summary, the standard of review on a decision from the Master on a question of law is correctness. The standard of review for facts accepted by the Master or factual inferences drawn by the Master from the evidence is reasonableness. The finding must amount to a palpable and overriding error. The imputed error must be plainly identified and must be shown to have affected the result.

On a question of mixed fact and law, if the principle of law cannot be extricated from the question, then the standard of review is again one of reasonableness only to be interfered with if a palpable and overriding error can be shown. If the principle of law can be extricated from the question, then the standard of review on the principle of law is correctness. [ 44 ] The manner in which the Peoples Trust application has proceeded raises questions related to the application of Rule 6.14(3) of the Alberta Rules of Court , Alta.

Reg. 124/2010, which states: 6.14(3) An appeal from a master’s judgment or order is an appeal on the record of proceedings before the master and may also be based on additional evidence that is, in the opinion of the judge hearing the appeal, relevant and material. [ 45 ] During the January 18, 2011 application before Master Hanebury, Peoples Trust argued that Swiss/Olympia was not entitled to any of the sale proceeds resulting from the judicial sale of the Champion 11 Avenue Apartment.

Peoples’ application was for marshalling and, in the alternative, an order that nothing was owing under the 907840 Champion Mortgage because (1) the plaintiffs had signed a discharge stating that they had been paid the monies owing in full and that the mortgage was wholly discharged, and (2) because the relationship between Nahal under the 907840 Nahal Mortgage and Champion under the 907840 Champion Mortgage was that of principal and surety and the discharge of the first acted as a discharge of the second.

The effect of the unilateral discharge of the mortgage and the First National decision were not addressed since the parties were not aware of that decision at the time of the hearing. [ 46 ] Master Hanebury found it unnecessary to decide the issues based on the grounds raised by Peoples. Rather, the Master based her decision on the First National decision.

As noted, she ruled that the effect of the unilateral discharge of the 907840 Nahal Mortgage was that the debt was deemed to be satisfied and therefore, nothing was owing under the 907840 Champion Mortgage. [ 47 ] On appeal, all of the parties, other than Nahal, filed briefs regarding the application of the First National decision and the Master’s application of that decision to the facts in this case. [ 48 ] In addition, the Appellants took the position that Peoples had not requested the relief granted by the Master, namely, an order that the debt owing to the Plaintiffs/Appellants was extinguished by the unilateral discharge of the mortgage.

They also took the position that the Respondents did not seek this relief since they did not bring the application and took no position on the issue although represented at the hearing before the Master. They argue that in order to find that the unilateral discharge of a mortgage results in a deemed satisfaction of the debt, there must be evidence that the mortgagor did not consent, and was thereby prejudiced, by the discharge. They argue that the Master drew inferences from facts that were not in evidence, namely, that Nahal did not consent and was prejudiced by the discharge.

They argue that these facts were not in evidence because they did not relate to the grounds argued by Peoples in support of the relief requested. [ 49 ] The Appellants further argue that Nahal did consent or acquiesce to the discharge because he did not raise this issue in the application before the Master, and in fact, took no position, and made no representations with respect to the issue of consent at that application, or at any time prior to it. Nahal in fact took no position and no representations were made on his behalf with respect to any of the issues raised in the hearing before the Master.

The Appellants further argue that it can be inferred that Nahal was not prejudiced by the discharge because he brought no application to redeem the mortgage being foreclosed, either before or after the final order for

foreclosure was granted. As a result, the Appellants argue that neither Peoples nor the Respondents are entitled to the relief granted bythe Master. [50] Rule 6.14(3) states that an appeal from a master to a judge is an appeal on the record of the proceedings. Prior to theenactment of new Rule 6.14(3), an appeal from a master was an appeal by way of trial de novo. Some case law suggests that the newrules have changed the standard of review to be applied on appeals from a Master. Although it did not decide the issue, the Court ofAppeal cast doubt on this conclusion in Gudzinski Estate v.

Allianz Global Risks US Insurance Company Limited, 2012 ABCA 5 inwhich it stated at paras. 21 to 25: ...At the time the chambers judge heard the appeal to her, the Rule provided that new evidence was admissible if it “is significant enoughthat it could have affected the Master’s decision”. The Rule (6.14(3)) has since been amended to clarify that the new evidence must be“relevant and material”, which carries forward the previous practice under the former Rules. Rule 6.14 accordingly provides its owninternal test for admitting new evidence on appeals from the Master: it must be “relevant and material”.

Since the Rule contains its owntest for new evidence, there is no longer room for the operation of the common-law test in R v Palmer (SCC), [1980] 1SCR 759, 30 NR 181. It is inapplicable to appeals from a Master to a judge. ... On a related issue, the chambers judge concluded that the new Rules have changed the standard of review to be applied on appeals fromthe Master. While Rule 6.14 says nothing expressly about the standard of review, some case law suggests that because it specifies thatappeals from the Master are “on the record”, a new standard of review is mandated.

Though it is not necessary to resolve this issue inorder to dispose of this appeal, dismissing this appeal should not be taken as embracing the comments on this subject in the reasons ofthe chambers judge. It is true that new Rule 6.14 says that the appeal is “on the record”, but appeals from the Master were always “on the record”. Justbecause the Rule expressly states that now does not necessarily change anything. See the

Interpretation Act, s 37(1)(b) (RSA 2000, cI-8). In any event, it is now imprecise to say only that appeals from the Master are “on the record”. Though the Rule states that suchappeals are “on the record”, it immediately goes on to state that they are also based on any further evidence that is placed before theQueen’s Bench judge on appeal. This is likewise a continuation of the previous practice. Further, where, as in this case, new evidence isput before the Queen’s Bench judge, it makes no sense to say that the Master’s decision on the facts should be reviewed for palpable andoverriding error.

The Master did not have the same evidence as the Queen’s Bench judge had, which compels a fresh assessment of thefacts. Whether the new “agreed facts” in this case may be law, which is always admissible even on appeal, or whether statute or the commonlaw may let judges take judicial notice of them without the need for proof, is a complex topic which need not be gone into here. [Emphasis added] [51] Gudzinski does not deal with a situation where the case law applied by the Master was not identified by the parties andtherefore not argued on the record.

The parties did not argue that the Master could not consider law that was not put before her during theapplication. The Master had the jurisdiction to apply a decision from the Alberta Court of Appeal that she found to be directly applicableto the case before her.

Although the parties did not have an opportunity to address the issue of the applicability of First National duringthe application before the Master, they were given that opportunity during this appeal. [52] The first issue is therefore whether Peoples applied for the relief granted and if not, whether Peoples is entitled to the reliefgranted despite the fact that it did not apply for it.

Peoples’ application seeks as relief, among other things, “an Order declaring that thereare no amounts outstanding under the [907840 Champion Mortgage ]”. [53] The Master ruled, at para. 19, of her decision that “the debt owing under that mortgage [the 907840 Nahal Mortgage] isdeemed to have been satisfied. There is no amount outstanding under the 907 Nahal mortgage.” After interpreting the 907840 ChampionMortgage, the Master concluded at para. 28: The 907 Champion mortgage is a collateral mortgage for the payment of money in default under the 907 Nahal mortgage.

With thesatisfaction of the debt owing under the latter, there are no funds in default and therefore nothing to be paid under the former.

[ 54 ] The relief granted by the Master was that requested by Peoples, however, the grounds for granting the relief were not the same as the grounds relied upon by Peoples. This, in itself, does not prevent the Master from granting the relief requested so long as it did not prejudice the parties. If the parties were prejudiced, the prejudice was relieved because the parties were entitled and did address the grounds for relief applied by the Master in these appeal proceedings.

As the Court stated in Gudzinski , though Rule 6.14 states that appeals from a master are “on the record”, it immediately goes on to state that they are also based on any further evidence that is placed before the Queen’s Bench Justice on appeal. [ 55 ] This leads to the second issue raised by the Appellants, which is whether the Master drew inferences from facts that were not in evidence, in this case, because the issues raised in the First National case and the case itself were not before her. Specifically, there was no evidence before the Master as to whether Nahal consented to the discharge.

I agree with the Appellants that these facts were not in evidence because they did not relate to the grounds upon which Peoples requested relief. [ 56 ] The Appellants argue that consent can be inferred from the fact that Nahal did not raise lack of consent as an argument in the hearing below or at any time prior to that. They argue that by failing to do so, it can be inferred that he consented or acquiesced to the discharge and that he did so because he did not think that the discharge prejudiced or injured him. I do not agree with these last two assertions.

First, the parties had an opportunity to present new evidence regarding Nahal’s consent during this appeal application. No one did so. As stated in Gudzinski , new evidence can be accepted on appeal if it is relevant and material. Evidence as to Nahal’s consent is clearly both. The Appellants have the onus of proof in these proceedings. If there was new evidence that Nahal consented or acquiesced to the discharge, the Appellants had an opportunity to provide it in these appeal proceedings. They did not do so.

I do not infer that Nahal consented or acquiesced to the discharge because he did not raise the issue at any time prior to the final order for foreclosure. The discharge was registered prior to the final order for foreclosure. There was no evidence that Nahal knew about the discharge prior to it being registered or at any time prior to the final order for foreclosure. The issue of whether Nahal consented to the discharge was not raised until the Master delivered her decision, long after the discharge was registered.

Secondly, as will be discussed later in this judgment, the case law does not require a mortgagor to show actual prejudice resulting from the unilateral discharge of a mortgage in order to obtain relief. [ 57 ] In the result, although there was no evidence before the Master that Nahal was asked for and gave his consent to the discharge, the parties had an opportunity to submit new evidence on this issue at this appeal. It was relevant and material. They did not do so. Further, as will be discussed below, the mortgagor of a mortgage that is unilaterally discharged need not prove actual prejudice to obtain relief.

As a result, I find that there is no basis for challenging the Master’s order on this basis. 2. Effect of foreclosure under one mortgage on prior and subsequent mortgages and covenants to pay under those mortgages [ 58 ] The Master did not address this issue and it was not necessary for her to do so.

Nevertheless, it formed part of the foundation for the Court of Appeal’s decision in First National, and its decision on this issue is helpful in understanding the ultimate issue to be determined in this appeal. [ 59 ] Harradence J.A., at para. 1, framed the issue before the Court in First National as follows: The issue on this appeal is whether covenants to pay and personal guarantees given pursuant to first, second and fourth mortgages are enforceable following a final order for foreclosure granted under a third mortgage, where the property, mortgagor, mortgagee and guarantors are common to each mortgage, and following discharges of the first, second and fourth mortgages by the mortgagee. [ 60 ] The facts in First National are as follows. [ 61 ] The mortgagor, L.J.V.

Holdings Ltd., granted four mortgages, each in the amount of $750,000, each to First National, and each on the same piece of property. All mortgages but the third were guaranteed by various individuals. L.J.V. defaulted and First National commenced actions against it on all four mortgages and against the guarantors of the first, second and fourth mortgages. On September 21, 1982, a final order for foreclosure was granted on the third mortgage which ordered that title be issued to First National, subject to its first, second and fourth mortgages.

[62] Although the final order for foreclosure was granted on September 21, 1982, it was not registered until March 4, 1986.Between those times, the land and the mortgages were transferred to companies related to First National under a corporatereorganization. The first and second mortgages and the causes of action under those mortgages were transferred to Block Bros. Realty for$1 each. The third and fourth mortgages and the cause of action on the fourth mortgage were transferred to First National Estates Ltd. for$1 each. [63] Block Bros.

Realty and First National Estates were sister companies and wholly owned subsidiaries of Block Bros. Industries.They were also related to First National, which was amalgamated into 6853477 Holdings Ltd. in the corporate reorganization. [64] When the final order for foreclosure on the third mortgage was registered on March 4, 1986, First National Estates was thetransferee of that mortgage, and title was therefore issued in its name. On March 7, 1986, First National Estates mortgaged the propertyto its sister company, Block Bros. Realty, for $1,845,000, as collateral security for intercorporate financing.

On April 14, 1986, BlockBros. Realty unilaterally discharged the first and second mortgages without consideration, and on April 25, 1986, First National Estatesunilaterally discharged its fourth mortgage without consideration. The mortgagors and guarantors received no credit for these discharges.As a result, the $1,845,000 mortgage to Block Bros. Realty became the first and only mortgage on the property. [65] Block Bros.

Realty then pursued its assigned actions on the covenants for payment under the first and second mortgages, FirstNational Estates pursued its assigned actions on the covenant for payment on the fourth mortgage, and First National’s successor pursuedits action against the individual guarantors. The actions were heard together. One issue was whether, because the mortgagees on all fourmortgages were the same, the foreclosure on the third mortgage satisfied the debts owing on all four mortgages. The Court of Appealruled, at para. 30, that it did not.

It stated that “... a final order of foreclosure on one mortgage will not extinguish the debt under othermortgages, notwithstanding the fact that the foreclosing mortgagee is the same person that now seeks to sue on the remaining debt.” The Court held that it was immaterial that each mortgage was granted by the same mortgagor, to the same mortgagee, on the sameproperty and that the property vested in the name of that mortgagee after the foreclosure. Each mortgage was granted to secure a separateadvance and was registered as a separate instrument.

As a result, each covenant to pay in each mortgage was a distinct obligation. [66] The Court based this decision on s. 44 of the Law of Property Act, R.S.A. 1980, c. L-8.

Section 44, now s. 48 of the Law ofProperty Act, R.S.A. 2000, c. L-7. It states that the effect of a final order of foreclosure was to vest the title of the land affected therebyin the mortgagee, free from all right of equity of redemption on the part of the owner or mortgagor, and “operates as full satisfaction ofthe debt secured by the mortgage...”. As a result, the foreclosing third mortgagee could not recover on the covenant to pay contained inthat mortgage.

However, the Court ruled that although the foreclosure of a prior mortgage extinguishes subsequent mortgages, it does notextinguish the debts secured by those mortgages. It found that this conclusion conformed with the decision and reasoning of the SupremeCourt of Canada in Isman v. Sinnott (1920), (SCC), 61 S.C.R. 1, 56 D.L.R. 485.

There, Idington J. ruled that theforeclosure and sale of a property by a mortgagee under its first mortgage did not prevent the same mortgagee from suing on thecovenant to pay in a second mortgage registered against the same property, but foreclosed off the property under the foreclosure. TheCourt ruled that two mortgages were distinct, having no connection with each other and not securing the same debt.

It states at p. 5 of thejudgment that this was “a case of two different mortgages never consolidated or used jointly in the foreclosure proceedings and havingno connection either with each other or with securing the same debt...” [67] In this case, as in First National, the mortgagees of certain of the mortgages on the Nahal 40 Acre Parcel were the same as thesecond mortgagees that sold the property under the foreclosure. Gottleib Professional Corporation and Swiss Investments were thesecond mortgagees.

Swiss Investments and Gottleib Professional Corporation were also mortgagees under the third and fourthmortgages. However, as was also the case in First National, each mortgage on the property was granted to secure a separate debt andwas registered as a separate instrument. As a result, each covenant to pay in each mortgage was a distinct obligation. The final order forforeclosure on the second mortgage did not extinguish the debt secured under the 907840 Nahal Mortgage. 3.

Effect of unilateral discharge of 907840 Nahal Mortgage on debt secured under that mortgage [68] This is a question of law and subject to a correctness standard of review.

a) Effect of s. 40 of the Law of Property Act [69] After the conclusion of the January 18, 2011 application before Master Hanebury, she requested that the parties make furthersubmissions on the application of s. 40 of the Law of Property Act.

[70]

Section 40 of the Law of Property Act states: 40(1) In an action brought on a mortgage of land, whether legal or equitable, or on an agreement for the sale of land, the right of themortgagee or vendor is restricted to the land to which the mortgage or agreement relates and to foreclosure of the mortgage orcancellation of the agreement for sale, as the case may be, and no action lies (

a) on a covenant for payment contained in the mortgage or agreement for sale, .... [71]

Section 40 has been interpreted by the courts as prohibiting a mortgagee from enforcing a security that is little more than apersonal covenant because it contains the same obligations as those contained in the personal covenant in the mortgage securing thesame debt.

The decisions depend upon the circumstances of each case, specifically the specific contractual provisions and thecircumstances surrounding the granting of the security. [72] The law is clear that s. 40 of the Law of Property Act restricts a lender from recovering any deficiency between the amountreceived under foreclosure proceedings and the amount which the mortgagor covenants to pay under the mortgage.

However, it does notprohibit or restrict a mortgagee’s ability to take additional or collateral security for the prime debt. [73] One of the leading authorities on this issue is the Supreme Court of Canada’s decision in Krook v. Yewchuk, (SCC), [1962] S.C.R. 535, 34 D.L.R. (2d) 676. In that case, a vendor sold his hotel business and took a mortgage on the land and achattel mortgage as security. The chattel mortgage was collateral security and secured the same amount as the land mortgage.

MartlandJ. ruled that the land mortgage and the chattel mortgage were separate securities securing the same debt, and that the chattel mortgagewas not an indirect means of enforcing the covenant to pay under the land mortgage. Martland J. stated that the purpose of s. 34(17) ofthe Judicature Act, R.S.A 1955, c. 164 (the equivalent of s. 40 of the Law of Property Act), was to prevent the mortgagee from takingthe land under the mortgage and enforcing the personal covenant granted in that mortgage.

Martland J. stated at p. 540: I do not find anything in this provision [s. 34] which forbids a debtor to give security for a debt on property in addition to mortgage onland or which forbids the creditor to enforce such security. [74] In a more recent decision of the Alberta Court of Appeal in Francois v. Vanderputt (1985), 1985 ABCA 8 , 60 A.R. 81, 16 D.L.R. (4th) 481 the Court ruled that the intent of s. 41 of the Law of Property Act (now s. 40) is to prevent a mortgagee fromrecovering a debt by taking the land under a mortgage and suing on the covenant to pay in that mortgage.

There, the vendor sold anapartment under an agreement for sale and took a mortgage on the purchaser’s home as collateral security. The Court of Appeal ruledthat s. 41 of the Law of Property Act was not intended to prevent a debtor from taking additional security.

It ruled that the vendor wasentitled to enforce the purchaser’s obligations under the agreement for sale and the collateral mortgage stating at para. 31: In the present case the vendor, in enforcing its security under the Agreement for Sale and the additional security under the mortgage,does not seek to recover a judgment or judgments on the personal covenants in either. The vendor’s recovery was limited to the securityunder each document.

The taking of such additional security does not fall within the restriction set out in s. 41. [75] This leads to the issue of the effect of a unilateral discharge of the 907840 Nahal Mortgage on the debt secured under thatmortgage. [76] As noted above, Master Hanebury ruled that she was bound by the Court of Appeal’s ruling in First National on this issue.She stated at para. 15:

The Alberta Court of Appeal held in First National Mortgage Co. v. L.J.V. Holdings Ltd. [1989] A.J. No. 317 , that if a mortgagee unilaterally registers a discharge of its mortgage, it is taken to have elected to accept the value, whatever it might be, that it received for the discharges in satisfaction of the debt. In that case no money was paid for the discharges. [ 77 ] With respect, I do not interpret the Court of Appeal’s decision in First National as authority for the proposition that a unilateral discharge of a mortgage by a mortgagee results in the satisfaction of the debt.

What the Court determined was that when a mortgagee unilaterally discharges a mortgage without the mortgagor’s consent, it is deemed to have taken the security granted to it under the mortgage in exchange for the mortgagor’s promise to pay secured by the mortgage. This prevents the mortgagee from taking both the land and suing on the covenant to pay secured by the mortgage on the land.

If the mortgagee takes the security on the land, it cannot also sue on the covenant to pay granted in the security. [ 78 ] In First National , the Court began by distinguishing the effect of the removal of a mortgage from title under a foreclosure, which it had previously found did not extinguish the mortgagor’s covenant to pay under that mortgage, and the unilateral discharge by the mortgagee. It stated, at para. 31, that “...the removal of a mortgage by operation of law as in a foreclosure and the voluntary discharge of a mortgage should not be equated.”

a) Loss of mortgagor’s right under s. 73 of the Law of Property Act [ 79 ] In First National , the Court ruled that the effect of a unilateral discharge of a mortgage by a mortgagee was governed by s. 64 of the Law of Property Act, R.S.A. 1980, c. L-8, now s. 73 of the Law of Property Act .

Section 73 of the Act does not differ in any material respects from s. 64 of the former Act. [ 80 ]

Section 73 of the Law of Property Act states: 73(1) When a mortgagor becomes entitled to pay off the balance owing on the mortgage, the mortgagor may require the mortgagee on receiving payment, instead of giving a discharge, to transfer the mortgage to a third party and the mortgagee is bound to transfer the mortgage as the mortgagor directs.

(2) When a person (

a) becomes entitled or obligated to pay off the balance owing on a mortgage, and (

b) pays to the mortgagee the balance owing on the mortgage, the mortgagee on receiving the payment, instead of giving a discharge, is bound on the request of the person who made the payment to transfer the mortgage as the person who made the payment directs.

(3) Any waiver or release of the rights, benefits or protection given by this

section is against public policy and void. [ 81 ] The Court ruled in First National that the reason that a unilateral discharge of a mortgage by the mortgagee precludes the mortgagee from suing on the covenant to pay, is because the discharge results in the mortgagor losing its rights under s. 64 of the Law of Property Act . The right which is lost was described by the Court at paras. 32 - 33: By the discharge of the mortgages the mortgagor lost its right under s. 64(1) Law of Property Act . [Section 64(1) was quoted]

Before the discharge of the mortgages, the mortgagor on repayment of the mortgage could have had the mortgage transferred as itwished and could, for example, have had the mortgage transferred to itself. As mortgagee it could then have foreclosed and obtained titleto the property.

That opportunity was removed by the Appellants' actions in discharging the mortgage and the Respondent mortgagorreceived no credit for this loss. [82] Thus, the s. 73 right that is lost by a unilateral discharge of mortgage is the right to have the mortgage transferred to themortgagor or its designate, when the mortgagor’s right to pay the mortgage in full arises. [83] A review of the First National decision, and the cases the Court referred to therein, indicates that the reason that a mortgageewho unilaterally discharges a mortgage is precluded from suing on the covenant to pay in that mortgage is because by discharging themortgage, it has unlawfully dealt with the mortgagor’s equity of redemption.

As a result, the mortgagee is deemed to have taken thatproperty right in exchange for the mortgagor’s promise to pay the debt secured under the mortgage. [84] The Court cited Traders Realty Ltd. v. Dion and Belanger (1986), (NB CA), 66 N.B.R. (2d) 262 (C.A.) insupport of its decision.

In that case, the Court ruled at para. 12 that the effect of a mortgagee unilaterally discharging a mortgage, withoutthe consent of the mortgagor, was that the “[mortgagee] ...must be taken to have given up any rights it had against the [mortgagor] underthe terms of the mortgage...” and that the “...[mortgagor is] deemed to be discharged from further liability under the mortgage...”[Emphasis added]. The Court did not state that the debt was discharged or satisfied, but only that the rights and obligations of themortgagee and mortgagor under the mortgage were deemed to be discharged.

The Court stated at para. 16 that the reason for this resultwas that “the security has been altered” as the mortgagors “would only have received back a portion of the security”. The Courtexplained that it seemed a “...simple proposition that if a mortgagee wishes to deal with the security it must give notice to the mortgagorwho has conveyed away his equity of redemption.” [85] In Traders Realty, the mortgagor sold its property to a third party who assumed the mortgage on the property.

The newproperty owner sold part of the property to another third party and the mortgagee discharged the mortgage against that part of theproperty. The assuming mortgagor defaulted, and the mortgagee foreclosed and sold the property under a power of sale and sued theassuming mortgagor and the original mortgagor on the covenant to pay.

The Court in First National, at para. 37, quoted the followingtwo passages from Traders Realty with approval: Hoyt, J.A. said at p. 266: Whether the sale of the whole of the mortgaged premises would have fetched a higher price is immaterial because Traders, by choosingto dispose of a portion of the security without notice to the Dions, must be taken to have given up any rights it had against the Dionsunder the terms of the mortgage.

Accordingly, the Dions, as mortgagors, were deemed to be discharged from further liability under themortgage by the mortgagee's release of a portion of the mortgaged property without notice to them. He explained the reason as follows (at p. 268): The distinction between this case on the one hand, and Royal and Ashade on the other, lies in the fact that here the security has beenaltered without the consent of one of the contracting parties. Had the Dions paid the outstanding balance owing on the mortgage whenthey received the Notice of Mortgage Sale, they would have been entitled to an assignment of the mortgage.

But they would only havereceived back a portion of the security. It seems to me to be a simple proposition that if a mortgagee wishes to deal with the security itmust give notice to the mortgagor who has conveyed away his equity of redemption. The mortgagor could then consider his position. Hecould, for example, enquire into the proposed sale of the portion of the security and assure himself that it was prudent and that theproceeds received would reduce the principal then outstanding.

Or he might do nothing in which case, if the sale was provident and theamount received applied to the mortgage, he might be deemed to have acquiesced. But at least the decision would be in his hands. [Emphasis added by Court in First National] [86] In First National, the Court found that the position of the original mortgagors in Traders Realty was analagous to that of asurety since the assuming mortgagors were also liable on the mortgage stating at para. 38:

The Dions’ [original mortgagors] position was analogous to that of a surety and in the law of surety unless there is a contract otherwise, adischarge of the mortgage relieves the surety of liability. [87] The Court in First National also cited Co-operative Trust Co. of Canada v. Target 21 Industries Ltd., (SK CA), [1988] 3 W.W.R. 97, 47 D.L.R. (4th) 349 (Sask. C.A.) in support of its decision. That Court found that the effect of a mortgageeunilaterally discharging a mortgage was that the mortgagee “must be taken to have accepted that security (as in foreclosure) and cannotsue on the covenant to pay”: at para. 45.

It stated that the reason for this was that “the mortgagee cannot return the entire security, as aresult of having dealt with it in an unauthorized manner...” Again, it did not conclude that the debt secured by the mortgage wasdischarged or satisfied but only that the mortgagee could not sue on the covenant to pay in the mortgage, because by discharging themortgage it had taken and could not return the entire security. In Target 21, the second mortgagee took title to the property throughforeclosure.

It then sold part of the property and the first mortgagee unilaterally discharged the mortgage on that part of the property. Thefirst mortgage contained a clause granting the mortgagee the power to do so.

The Saskatchewan Court of Appeal ruled, at para. 45, that“since the mortgagee cannot return the entire security, as a result of having dealt with it in an unauthorized manner, it must be taken tohave accepted the security (as in foreclosure) and cannot sue on the covenant to pay.” [88] In First National, the Court found that the facts there more closely resembled those in Target 21 and ruled, at para. 40, that itwas prepared to follow the case “...in holding that by being unable to transfer the mortgage to either the mortgagor or his designate, themortgagee is in the same position as if he had acquired the property by foreclosure and then disposed of it.” The Court considered theeffect of the sale of property by a mortgagee following a foreclosure and concluded that by foreclosing and thereby being unable totransfer the mortgage to the mortgagor, the mortgagee had “elected to forego the debt”: para. 44. [89] The Court in First National also cited Rushton v.

Industrial Development Bank, (SCC), [1973] S.C.R. 552 insupport of its decision. There, two mortgagors, a husband and wife, executed one mortgage in favour of the bank (IDB), which mortgagewas registered against two separate properties, one owned by the husband, and one owned by the wife. The first mortgagee on thehusband's property foreclosed and IDB redeemed that mortgage and foreclosed, vesting title to the property in its name. It then sold partof the property. The first mortgagee on the wife’s property then commenced a foreclosure action under its mortgage.

IDB made a claimin that action for the balance owing on the debt secured under its second mortgage, giving credit for the amounts it had received from thesale of a portion of the husband’s property. The majority of the Supreme Court of Canada ruled that it was not entitled to do so, stating atp. 566: By taking the course that it did in respect of the husband's property and then seeking to prove for the mortgage debt in the Essonforeclosure action [on the wife’s property], IDB was in an inconsistent position.

It had made its election to forego the debt by disablingitself from restoring all the security given for that debt. [Emphasis added] [90] Based on the foregoing, the Court in First National stated at para. 44: Thus when property cannot be returned after a foreclosure at common law, the mortgagee is deemed to have elected to forego the debt.The reason why he must forego the debt is because he is taken to have accepted the land for the debt, and the debt is thus satisfied.[Emphasis added] [91] The facts and the resulting reasoning in Rushton are not applicable to the present case.

In Rushton, the husband and wife wereco-mortgagors under one mortgage. As a result, the two properties served as joint security for one debt. When IDB sold part of thehusband’s property, it was unable to return it to the wife had she decided to redeem the second mortgage on her property.

The mortgageewas therefore deemed to have taken the husband’s property in exchange for both mortgagors’ covenants to pay under the joint mortgage.Because the covenant to pay was granted under one mortgage by co-mortgagors both equally liable for the debt, the mortgagee had to beable to transfer both properties to either mortgagor should they decide to redeem the mortgage.

The rationale is explained at paras. 20 to24 of the Rushton decision: ...The issue, as I see it, is whether IDB is entitled to treat as two mortgages, in relation to foreclosure alone, without sale, what it hadtaken as one composite mortgage, under which there was no severance of the debt, or of the respective properties given to answer for the

debt.

Putting the matter another way, was the attempt of IDB to prove its claim in the Esson foreclosure action equivalent to a suit on thecovenant in the Rushton mortgage [the foreclosure on the husband’s property] or to a claim for a deficiency judgment for the balance ofthe debt secured by that mortgage, or was that a permissible pursuit of the debt against a part of the security? [Emphasis added] [92] The Court explained that a foreclosing mortgagee cannot both take the property under the foreclosure and sue the mortgagoron the covenant to pay in that mortgage, stating at para. 22: The principle is the same where a mortgage by the mortgagor secures the mortgagee for the one debt with two parcels of land by themortgagor and where the mortgagor forecloses upon one parcel only.

Since, apart from contract to that effect (and there is no suchcontract here), a mortgagee can resist redemption of part of the security unless the whole is redeemed, the mortgagor correlatively isentitled to have all his security available if he is sued for the mortgage debt [authorities omitted]. Hence, although the mortgagee mayseek to foreclose upon the second parcel after having foreclosed upon the first, he must be in a position to return the first parcel as wellas the second in proceeding with the second foreclosure. ... The problem in the present case was tangentially considered by Warrington J. In Gee v.

Liddel at p. 72 as follows: Two persons mortgage in one deed their respective estates to secure an advance made to one of them, and the deed gives to each of thempower to redeem, and it appears on the face of the deed that as between the two the estate of the person to whom the money is paid is tobe primarily liable. Has not the person who joins in mortgaging his own estate by virtue of that deed itself an interest in the estate of theperson to whom the money is advanced?

In my opinion he has, and I think that the nature of his interest is a charge upon the estate of theprincipal debtor by way of indemnity for the purpose of enforcing against that estate the right which he has, as between himself and theprincipal debtor, to have that estate resorted to first for the payment of the debt. If it were not so, the result would be a startling one...[Emphasis added] [93] The facts in this case are distinguishable from the facts in Rushton and the cases cited therein. Nahal and Champion did notmortgage both of their properties as co-mortgagors under one mortgage.

Rather, Nahal was the sole mortgagor under the 907840 NahalMortgage, which was referred to as the “primary mortgage”, and the mortgage was secured as a separate instrument against Nahal’sseparate property in May 2007. Champion was the sole mortgagor under the 907840 Champion Mortgage, which was referred to as acollateral mortgage, and was registered as a separate instrument against Champion’s separate property in September 2007.

Further,paragraph 21of the 907840 Champion Mortgage specifically states that “the foreclosure, cancellation or any other dealing with any othersecurity for the moneys advanced or secured hereby shall not release or affect this Mortgage...”. [94] In First National, the Court also quoted the following passage from Douglas v.

Mutual Life Assurance Co. (1918), (SCC), 57 S.C.R. 243 at p. 247, cited at para. 44 of its judgment, as supporting the foregoing statement: Under the law of England such a foreclosure on a common-law mortgage admittedly did not extinguish the debt or prejudice the right ofthe mortgagee to recover on his collateral securities. Of course, the mortgagee could not after foreclosure claim to hold the land and atthe same time sue on a covenant for the debt or recover it under his collateral securities. He could not have both land and the moneysecured upon it.

If he chose to foreclose and then sell the land or part of it, he would be taken to have elected to take the land for hisdebt. [Emphasis added] [italics in original] [95] The foregoing decision is only cited as authority for the effect of a foreclosure on the underlying debt secured by a mortgageunder the common law. The mortgagee is precluded from both taking the land under foreclosure and suing on the covenant to pay in themortgage. [96] It is trite law that the discharge of a security such as a mortgage, does not discharge the debt secured under the mortgage butmerely removes the charge.

The Appellants referred to a number of cases as authority for this proposition. I agree with that proposition.However, in the cases referred to, the mortgagees did not intend to discharge the mortgages when there was debt remaining to be paid. Inthis case, the Swiss/Olympia unilaterally discharged the mortgage knowing that debt remained owing. The cases referred to are thereforenot helpful as to the effect of a unilateral discharge of a mortgage in such circumstances.

[ 97 ] In First National , and the cases cited therein, the mortgagees were deemed to have elected to have taken the land secured under a mortgage, because of their unilateral discharge of the mortgage. Because of the discharge they were unable to return the security in the land that had been granted to them by the mortgagor. The mortgagees then attempted to sue the mortgagor on the covenant to pay in the discharged mortgage. They were precluded from doing so because a mortgagee cannot have both the land and the money secured upon it. In this case, Swiss/Olympia does not seek to sue Nahal on the debt secured under the 907840 Nahal Mortgage.

b) Requirement to show actual prejudice [ 98 ] As discussed above, the Appellants argued that Nahal’s failure to object to the discharge is evidence that he acquiesced or consented to the discharge because he did not think the discharge prejudiced or injured him. [ 99 ] Neither s. 73 of the Law of Property Act , nor the cases dealing with the effect of a unilateral discharge of a mortgage, require a mortgagor to show actual prejudice resulting from a unilateral discharge of mortgage. [ 100 ] A mortgagor’s right to redeem its equity of redemption, when it is entitled to pay the mortgage in full, is a property right protected by statute under s. 73 of the Law of Property Act and cannot be waived.

In First National , the Court of Appeal referred to the fact that s. 64(3) of the Law of Property (now s. 73(3) of the Law of Property Act ) would have a bearing on the issue, however it was not applicable there since s. 64(3) was enacted after the mortgages in question were granted. [ 101 ] As noted above, s. 73(3) provides that any waiver or release of the rights, benefits or protection granted under s. 73 is against public policy and void. [ 102 ] In First National , as noted above, after referring to the mortgagor’s loss of rights under the former s. 63 of the Law of Property Act , the Court explained that before the discharge of the mortgages and on payment of the mortgage, the mortgagor could have had the mortgage transferred to its designate, which included itself.

It could then have foreclosed and obtained title to the property.

The Court did not refer to any evidence or representations by the mortgagor that it had in fact been prejudiced by the unilateral discharge of the mortgages. [ 103 ] The conclusion that actual prejudice need not be proved can be implied from the Court’s statement in Traders Realty at p. 266 that “whether the sale of the whole of the mortgaged premises would have fetched a higher price is immaterial because [the mortgagee], by choosing to dispose of a portion of the security without notice to the [the Mortgagor] must be taken to have given up any rights it had against the [Mortgagor] under the terms of the mortgage.” [ 104 ] The mortgagor is prejudiced by the loss of its right under s. 73 of the Law of Property Act . [ 105 ] The prejudice resulting from the unilateral discharge of a mortgage can be understood in circumstances where the property value has increased at the time of the foreclosure or is similar in value to the amounts owing under the mortgage being foreclosed.

In either case, the mortgagor has the option of paying out the mortgage being foreclosed, having the mortgage transferred to it, and foreclosing itself. Once the land is vested in the mortgagor under the foreclosure, it has the option of dealing with the land in a manner that is advantageous to it. It can, for example, sell the land or remortgage it to pay off its debt.

If the mortgagee unilaterally discharges a mortgage, the mortgagor is deprived of these options. [ 106 ] In First National , the Court did not discuss whether, or find that, the mortgagor would have exercised its right to payout the third mortgage, foreclose, and have title issued in its name. However, the Court’s statement of facts indicates that it considered the potential prejudice to the mortgagor and the guarantors. According to the facts, the value of the property at the time the final order for foreclosure was granted was similar to the amounts owing under all four mortgages.

The Court’s statement of facts refers to the valuation information that was before the master when the final order for foreclosure was granted. It indicates that there may have been little difference between the value of the land and the cumulative value of the amounts owing under the four mortgages. The land value appraisal before the master at the time the final order for foreclosure was granted valued the property at $4,405,000. At the subsequent

trial regarding the issue of whether the mortgagees had a right to sue the mortgagor on the covenants to pay, and the guarantors under their guarantees, the trial court found that the cumulative balance owing on all four mortgages was approximately $4,200,000. A subsequent appraisal, which was not filed until after the final order for foreclosure was granted, valued the property at $3,783,000. Assuming this was the value, the difference between that value and the cumulative amount found to be owing on the four mortgages of $4,200,000, was only $417,000.

By unilaterally discharging the third mortgage, the property vested in the third mortgagee. Not only was the property worth more than the amounts owing under the third mortgage (found at trial to be $1,088,473.90), the third mortgagee ended up with title to the property free of the first, second and fourth mortgages. As noted above, the mortgagees of these mortgages were related to the third mortgagee and unilaterally discharged their mortgages for $1 each. This allowed the third mortgagee, now the owner of the property, to remortgage the property as collateral security for intercorporate debt.

The discharge of the third mortgage therefore potentially prejudiced the mortgagor. [ 107 ] In addition, potential prejudice resulted in First National because the former mortgagees of the discharged mortgages sought to sue the guarantors and the mortgagor under the covenants to pay in those mortgages. The Appellants argue that there is no similar prejudice to Nahal in the present case, as the Appellants are not seeking to sue him under the covenant to pay under the 907280 Nahal Mortgage.

However, whether or not they choose to sue Nahal on the covenant to pay, Nahal was prejudiced by the unilateral discharge of the mortgage because he was deprived of his right to redeem his equity of redemption, a right granted to him under s. 73 of the Law of Property Act . Swiss/Olympia is thereby deprived of its right to sue Nahal under his covenant to pay under that mortgage.

Had they not unilaterally discharged the mortgage, Nahal had the option of electing to payout the mortgage, prior to the registration of the final order for foreclosure, and thereby prevent Swiss/Olympia from suing him on the covenant to pay. He would then have had the option of taking other actions with regard to the land that he considered to be advantageous to him. Without evidence or representations on this matter, it cannot be presumed that he would not have done so. More importantly, any waiver or release of his rights under s. 73 of the Law of Property Act is against public policy and void.

c) Requirement for mortgagor to elect to payout the mortgage and have it transferred [ 108 ] The Appellants point out that s. 73(1) of the Law of Property Act provides that a mortgagor “may” require a mortgagee, on receiving payment, to transfer the mortgage. It argues that the inclusion of the word “may” suggests that the mortgagor must make an election in order to enforce its right. They argue that Nahal gave no evidence that he wanted to redeem either the 907840 Nahal Mortgage or the 907840 Champion Mortgage.

They also note that Nahal took no position to this effect during the application before Master Hanebury or at any time prior to that. They submit that as a result, Nahal is deemed to have consented or acquiesced to the discharge. [ 109 ] The facts in this case are distinguishable from the facts before the Court of Appeal in First National . In that case, the mortgages were not unilaterally discharged until after the final order for foreclosure had been granted. In this case, Peoples’ Order Nisi/Order for Sale was granted on August 5, 2010.

The Appellants were then granted an order allowing them to conduct the judicial sale on October 21, 2010. The Order Confirming Sale was granted on November 30, 2010. Nahal therefore had notice that he was about to lose his right to redeem the property during this time but did not elect to payout the mortgage and redeem it. [ 110 ] I do not find this argument persuasive. Nahal’s right to redeem the mortgage continued at least until the property was sold under Final Order for Foreclosure. The Discharge of Mortgage was registered almost two weeks prior to that.

There is no evidence that Nahal was given notice of the Appellants intent to discharge the mortgage or that his consent was requested. In any event, any waiver of his right to a transfer of the 907840 Nahal Mortgage is void pursuant to s. 73(3) of the Law of Property Act .

d) Application of the law [ 111 ] Applying the decision in First National , Master Hanebury concluded, at para. 17: This right [the right granted under s. 63 of the Law of Property Act ], the Court said, cannot be removed without the authorization of the mortgagor. If it is, and the mortgagee cannot transfer the mortgage as directed by the mortgagor, the effect is the same as if the mortgagee had acquired the property by foreclosure and then disposed of it. The debt is deemed to be satisfied . [Emphasis added] [ 112 ] The 907 Nahal Mortgage could not be transferred to Nahal as it had been unilaterally discharged.

The Master, at para. 18, concluded that as a result “... the debt owing under that mortgage is deemed to have been satisfied . There is no amount outstanding under

the 907 Nahal mortgage. ” [Emphasis added] [ 113 ] I agree with the Master’s conclusion that the “debt owing under the mortgage is deemed to have been satisfied.” However, with respect, this is not the same as the debt being “satisfied”. It does not lead to the conclusion that there was no amount outstanding under the 907840 Nahal Mortgage. The debt secured by the discharged mortgage is deemed to be satisfied. The deemed satisfaction of the debt occurs by operation of law as a result of the mortgagee’s contravention of s. 73 of the Law of Property Act .

This must be distinguished from the debt being satisfied through repayment or through some other agreement reached between the parties. [ 114 ] The fact that a “debt owing under a mortgage is deemed to have been satisfied” is based upon the mortgagee’s “ deemed election to forego the debt” secured under that mortgage. This deemed election and resulting deemed satisfaction of the debt results from the fact that by unilaterally discharging the mortgage, the mortgagee denies the mortgagor of its right to redeem its equity of redemption.

The mortgagee cannot return the security, the right to the land, given to it by the mortgagor. The legislature has provided, under s. 73 of the Law of Property Act , that the mortgagor’s right to a transfer of the security is a right that cannot be waived. The courts have ruled that a mortgagee’s unilateral discharge of a mortgage, in contravention of s. 73, is the equivalent of an election by the mortgagee to take the mortgagor’s equity of redemption, a property right, in place of its right to personally sue the mortgagor on its covenant to pay in that mortgage.

The mortgagee cannot have both the land and the money secured under the mortgage on the land. [ 115 ] In First National , and the cases cited therein, this was precisely what the mortgagees were attempting to do. The mortgagee had discharged its mortgage without the mortgagor’s consent and was thereby deemed to have elected to take the mortgagor’s equity of redemption. As a result, the debt owing under the mortgage was “deemed” to be satisfied. The mortgagee then sued the mortgagor on its covenant to pay in the discharged mortgage.

The mortgagee was precluded from doing so as the mortgagee cannot take the both the land and the money secured upon the land. [ 116 ] First National did not deal with the situation that is before this Court. Here, the mortgagees do not seek to take the land secured under the 907840 Nahal Mortgage and to sue Nahal on the covenant to pay secured by that mortgage. Because of Swiss/Olympia’s unilateral discharge of their mortgage, they are deemed to have taken Nahal’s equity of redemption under that mortgage in place of their right to sue on the covenant to pay in that mortgage.

However, they are not now attempting to sue Nahal on the covenant to pay in the discharged mortgage. They are asserting their right to be paid on the covenant to pay given to them by Champion under a separate mortgage on a separate piece of property. [ 117 ] I therefore conclude that the Master erred in law when she concluded that the unilateral discharge of the 907840 Nahal Mortgage satisfied the debt secured by that mortgage. It did not satisfy the debt but extinguished the mortgagee’s right to sue Nahal on the covenant to pay secured under that mortgage. 4.

Effect of unilateral discharge of 907840 Nahal Mortgage on covenant to pay granted by Champion under the 907840 Champion Mortgage [ 118 ] Master Hanebury concluded that the 907840 Champion Mortgage was described as, and was, “collateral” security, “provided only to ensure payment of any amount under what it called the ‘primary mortgage’” The Master concluded at para. 28: The 907 Champion mortgage is a collateral mortgage for the payment of the money in default under the 907 Nahal mortgage.

With the satisfaction of the debt owing under the latter, there are no funds in default and therefore nothing to be paid under the former. In

summary, with the discharge of the 907 Nahal mortgage, Swiss Olympia released Champion from any further liability under the 907 Champion mortgage. [ 119 ] I have ruled that Master Hanebury erred in law in concluding that the debt owing under 907840 Nahal Mortgage was satisfied by the unilateral discharge of that mortgage.

[ 120 ] I must now consider whether the discharge of the 907840 Nahal Mortgage rendered the 907840 Champion Mortgage otherwise unenforceable. [ 121 ] The 907840 Champion Mortgage was foreclosed off the title to the Champion 11 Avenue Apartment. I reiterate the Court of Appeal’s ruling in First National .

A final order of foreclosure on one mortgage does not extinguish the debt secured under other mortgages on the same property, despite the fact that the foreclosing mortgagee and the mortgagee seeking to sue on the covenant to pay on another mortgage are the same. [ 122 ] This issue of the effect of a unilateral discharge of one mortgage on the debt secured under a collateral mortgage granted by a separate individual on a separate property, was not before the Court in First National .

There, the mortgages unilaterally discharged were granted by the same mortgagor, to the same mortgagee, on the same property. [ 123 ] In interpreting the 907840 Champion Mortgage, the Master found the term “collateral” security is more a commercial term than a legal term and that its meaning was to be determined based upon the dealings between the parties, the type of transaction and the nature of the securities.

a) Dealings between the parties [ 124 ] There was no evidence before the Master regarding the circumstances under which the 907840 Mortgages were granted. [ 125 ] The Master considered whether the 907840 Champion Mortgage was given for a separate advance of funds to Champion. The Master found that there was no evidence that the 907840 Champion Mortgage was granted to secure an advance of funds from 907840 to Champion or to secure a guarantee by Champion. The Master found no basis for ruling that an advance to Nahal could be considered an advance to Champion.

She found that while Nahal was the principal of Champion, he and Champion were separate entities and there were no grounds for lifting the corporate veil between them. The Master’s conclusions were based on mixed findings of fact and law, and I find that they were reasonable.

b) Nature of the transaction [ 126 ] The 907840 Champion Mortgage was entitled a “collateral” mortgage. The Master considered the definition of “collateral security”. The

definitions quoted in her judgment state that a collateral mortgage is given to secure the performance of a contract or the discharge of that obligation and is “additional” to the obligation of the contract. It is defined as a “separate obligation attached to another contract to guarantee its performance” and as a “concurrent security for another debt” which is “designed to increase the creditor’s means to realize on the principal”.

c) Terms of the 907840 Champion Mortgage [ 127 ] One introductory paragraph of the 907840 Champion Mortgage states: This mortgage is collateral to a mortgage between...Nahal and the Mortgagee registered [on the Nahal 40 Acre Parcel] (hereinafter the “ Primary Mortgage ”) and is given as additional and continuing collateral security to the Mortgagees (sic) the payment of all monies now due or owing or which shall hereafter become due or owing to the Mortgagees under and by virtue of, and not in substitution for, the Primary Mortgage ... [Emphasis added] [ 128 ] The paragraph continues as follows: This Collateral Mortgage shall be considered to be collateral security for all or any part of the monies secured pursuant to the Primary

Mortgage however it is understood and agreed that the Mortgagees may pursue their remedies under either of the said mortgages concurrently or successively at their option .

Any judgment or recovery hereunder or under the Primary Mortgage for the monies secured shall not affect the right of the Mortgagee to realize upon the other and the rights and remedies under the other mortgage continue notwithstanding that the Mortgagee has exhausted its rights and remedies under one of the mortgages . [Emphasis added] [ 129 ] The Master considered the fact that demand for payment could be made under either mortgage and that the mortgagee could pursue its remedies under the two mortgages “concurrently or successively, at its option.”: at para. 24.

However, she found that this did not change the fundamental purpose of the collateral mortgage, which was to secure payment of all amounts due or owing under the primary mortgage, the 907840 Nahal Mortgage.

Based on her finding that the debt owing under the 907840 Nahal Mortgage was deemed to have been satisfied and that there was therefore no amount outstanding under that mortgage, she found that there was no money owing under the 907840 Champion Mortgage. [ 130 ] I agree with the Master’s reasoning that although either mortgage could have been enforced to secure the debt, if there was no debt owing, nothing could be collected.

Although the mortgagees could have enforced the 907840 Champion Mortgage to secure payment of the debt owing, and never have resorted to the 907840 Nahal Mortgage, they could only have done so if there was debt owing under the 907840 Nahal Mortgage. [ 131 ] The Master then considered the fact that the 907840 Champion Mortgage did not state that it was a continuing liability should the primary mortgage be discharged, that it would continue if all or part of the Nahal 40 Acres were sold, or that the mortgagees could sue on the covenant to pay in the 907840 Champion Mortgage if they had discharged the 907840 Nahal Mortgage. [ 132 ] Although the 907840 Champion Mortgage does not specifically refer to the foregoing circumstances, it does state that: any “judgment or recovery under [either mortgage] for monies secured...shall not affect the right of the mortgagee to realize upon the other and any remedies [under either mortgage] continue notwithstanding that the mortgagee has exhausted its rights and remedies under the [other mortgage].” [Emphasis added]. [ 133 ] The reason the mortgagees cannot sue on the covenant to pay in the 907840 Nahal Mortgage is because they cannot transfer to Nahal the interest in the mortgage which they unilaterally discharged.

The effect of the unilateral discharge may be characterized as having the effect of “exhausting” the mortgagees’ rights and remedies under the 907840 Nahal Mortgage. [ 134 ] More importantly, the following very broad wording under paragraph 21of the 907840 Champion Mortgage does state that the “foreclosure, cancellation or any other dealing with any security for the monies ...shall not release or affect” the 907840 Champion Mortgage: It is further agreed that the waiver of one or more defaults under this Mortgage or the Primary Mortgage shall not be construed as a waiver of any subsequent or other default.

AND it is further agreed that the foreclosure, cancellation or any other dealing with any other security for the moneys advanced or secured hereby shall not release or affect this Mortgage and that the taking of this Mortgage or the foreclosure or cancellation of or any other dealing with, or proceedings under this Mortgage shall not release or affect any other security held by the Mortgagee for the moneys advanced or secured hereby. [Emphasis added] [ 135 ] The Court of Appeal in First National, and the decisions it relied upon, state that it is the fact that the mortgagee has dealt with the security that prevents it from suing on the covenant to pay granted by the mortgagor under that security.

The security referred to is the mortgage securing the mortgagor’s covenant to pay.

In this case, not only is the security granted under the 907840 Champion Mortgage a separate mortgage by a separate party on a separate property, that Mortgage expressly states that the mortgagee can “deal with the security” granted under the 907840 Nahal Mortgage without releasing or affecting the rights given to the mortgagee under the 907840 Champion Mortgage. [ 136 ] In Traders Realty , the mortgage had been assumed by the purchaser of the mortgaged property and the mortgagee sued both the assuming mortgagor and the original mortgagors on the covenant to pay in the assumed mortgage.

The Court of Appeal in First Na

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